Big Tech Girds Its Loins For a Big Fight

Elizabeth Warren is only the noisiest of the politicians calling for the dismemberment of what has come to be called Big Tech. In the good old days, when Teddy Roosevelt brandished his big stick at J.P. Morgan’s railroad trust, and had his attorney general file a suit to bust that trust, the financier visited the White House and told the President, “If we have done anything wrong, send your man to my man and they can fix it up.” It is not known whether Mark Zuckerberg made a similar suggestion to President Trump when he visited the White House on September 19, but even though the President has great faith in his ability to out-deal the likes of the Facebook founder and CEO, it is unlikely that negotiations were opened.

If those who fear that Amazon, Facebook and Google are simply too big, that with their size comes economic power and with that comes political power have their way, these companies will be broken up. Consumers and businesses will confront and be served by a radically restructured sector of the economy that has changed the way we communicate, get news, shop, do research and live our lives. The call for the break-up of Facebook, Google (for convenience I use that designation rather than its parent Alphabet), Amazon and perhaps other companies goes far beyond what competition enforcers at the European Commission have been doing — fines, forcing an end to certain practices, but leaving the structures of the companies untouched.

The challenge is serious, more so because it is part of a basic rethinking of competition law, dominated for decades by the so-called Chicago School, led by my former American Enterprise Institute colleague Robert Bork. In brief, no consumer harm, mostly in the form of higher prices, no antitrust problem. Companies giving away their services (Google, Facebook), or driving prices down (Amazon), could not possibly be violating the law. They are the consumers’ friends.

Congressman David Cicilline, the Democrat who chairs the House antitrust subcommittee, is not so sure. He has issued a sweeping demand for Big-Tech company documents, and will soon hold hearings. His counsel, Lina Kahn, triggered the policy re-think when at Yale Law School. The attackers also include the Federal Trade Commission, the Department of Justice, the attorneys general of 48 states plus Puerto Rico and DC (California, home to many of these companies, and Alabama have abstained), assorted academics. Add Big Tech’s competitors, who claim they are being unfairly put upon by their bigger rivals, and you have a formidable army of attackers.

Their targets are relying on the fact that mere size is no offense under existing competition law. So long as they can show that their size results from superior efficiency and skill, from building the proverbial better mousetrap, it will be difficult for even the most skilled lawyers to persuade a judge to follow the lead of a court which, on New Year’s day 1984, ordered the dismemberment of AT&T, the giant provider of communication services to the benefit, as it turns out, of consumers who were tied to Ma Bell by wires and circular dials, and now are free to roam.

Big Tech has three problems in relying on that defense: the political climate, their acquisitions, and their business practices.

While it is true that size alone is no offense, there is a new and powerful criticism being labelled at big business, including but not limited to Big Tech. Joseph Stiglitz, Columbia professor, winner of the Nobel Memorial Prize in Economic Sciences and author of “People, Power, and Profits, argues that economic power, which in the context of his book refers to big companies, confers political power. Google is America’s largest corporate spender on lobbyists, and both Facebook and Amazon are among the top twenty. That, plus the ability “to lawyer up”, converts size into political power. That enables corporate giants occasionally to write the large print in proposed legislation, and much more often the small print that weakens the larger.

The second problem Big Tech will have when using the “size-is-no-offense” defense is that they grew largely by acquiring other companies. Amazon has bought or invested in at least 128 companies in the past 20 years, and its appetite seems undiminished. Facebook grew by snapping up some 79 or 90 companies (estimates vary), including Instagram and WhatsApp, the latter, according to leaked emails, because it could “morph into Facebook … the biggest competitive threat we face as a business,” according to Javier Olivan, the company’s head of growth. Google has more than 200 acquisitions under its belt, including YouTube, Nest Labs and DoubleClick. In this era of newly revived antitrust enforcement, many of these deals might have been turned down by regulators because they harmed competition, real or potential. The approval of those deals is now being reviewed by the authorities.

Big Tech’s third problem is some of its anti-competitive business practices, which might have contributed more to the companies’ growth than the construction of better mouse traps. Amazon’s use of own-brand merchandise to compete with independent vendors who use its distribution system to distribute their apparel, batteries, food and other products is causing concern, as its use of pre-announcements and predatory pricing in some product markets. When Amazon, which at the time had not entered the meal-kit market, announced a plan to do just that, it sent Blue Apron’s shares plummeting. “Amazon Meal Kits” are now prominently displayed in Whole Foods stores, acquired by Amazon for $13.7bn in cash in 2017. Any company attempting to raise capital to enter some market is always asked by potential investors, “How will Amazon respond?” That might not be market power as traditionally measured in market share, but it nevertheless power to stifle competition.

Google, with what regulators (but not Google) consider a dominant share of the search market, allegedly uses the market power that its large share confers as leverage to promote its own maps and other products over those of small competitors in those markets. Facebook’s promises of reform remain just that, and its lack of competition has prevented users from switching to other platforms in protest. Or so its critics claim.

Facebook, at Zuckerberg’s order, blocked some companies that “are trying to build social networks and replace us” from advertising on Facebook.

Meanwhile, in a move that is either courageous or reckless, Google has presented itself as a test case of the new, reinvigorated competition policy. It will be seeking regulatory approval to buy Fitbit, maker of what are called wearable fitness products, for $2.1bn. The price is no problem: it comes to less than 2% of the company’s net cash balance. Advertising provides more than 80% of Google’s revenue, and it and Facebook account for 56.8% of all digital ad spending (37.2% and 19.6% for Google and Facebook, respectively, according to eMarketer). Google says it will not use the health data available from Fitbit’s 28 million active users to better target its ads and thereby increase its market share. Regulators will want more than mere promises.

This is not the place to consider whether competition from other advertising outlets, or emerging competitors (among them Amazon) is sufficiently intense to make digital dominance by Google and Facebook irrelevant – whether customers could switch to other media if prices of digital ads were raised to unreasonable levels. Lots of lawyers and economic consultants, not to mention lobbyists for both companies, will be comfortably retired before that issue is decided.

Which brings us back to the EC approach – order an end to anticompetitive practices, levy fines, but do not break up these companies. That approach can be and has been effective, to a degree, but it does require continued oversight by the regulators. An alternative remedy is forced restructuring, breakup in some form, a remedy that much reduces the need for monitoring the affected markets.

Amazon might be required to make its infrastructure widely available, a sort of utility-like essential facility, which would not be very different in effect from breaking up the company. It might also be required to cease selling own-brand products in competition with small companies who sell via Amazon. Google might be required to spin off products and services that compete with independent providers, making its products compete on their merits, devoid of any leveraged advantage provided by the search engine. And Facebook might be forced to divest companies it should never have been allowed to acquire in the first place.

Mark Zuckerberg assured his staff that he will “go to the mat” to fight efforts to break up his company, and that “we will win”. I remember executives at my then-client AT&T telling me the same thing.